How to Execute an Early Retirement – Secrets of an Ex-banker

John has been in this industry for over 25 years, and his lack of bias and general concern for the financial well-being of Canadians has made him one of the very few financial planners that I actually trust and go to whenever I want an unbiased 2nd opinion or some analysis done on my investments and financial plan.

In fact, last year my wife and I hit our financial independence number (meaning our investments were large enough that we didn’t have to work anymore) and so we both quit our jobs, she retired, while I decided to semi-retire. Now one of the big questions that came up after we hit financial independence was how to change and optimize the investment portfolio now that we’re retired and semi-retired? In other words, when you no longer have 2 full time salaries to pay for everything, how do you actually live off the investments?

The 2nd big question was “Can you analyze and stress-test all our financials to see if we actually do have enough to retire?”.

You see, I’ve done lots of financial planning for myself and others but I find that when it’s your own money and your own financial plan, there’s value in having another unbiased professional do your financial plan to at least get a 2nd opinion and ensure that what you have planned is optimized from an investments perspective, and to ensure that you’re paying the lowest taxes possible.

It’s also good to have a 2nd opinion in case you have any biases since it is your own money, and you inherently want your numbers to work so that you can have an early retirement.

What I did for this episode is approached John to see if he can be my family’s financial planner and do a financial plan for us. We then used our financial plan as a case study on this episode, so that you and other Canadians can get some insights on how to actually execute an early retirement, while at the same time get a better understanding of what a financial plan should include, what it can do for you, and get some insider tips from an real ex-banker on what to look out for when you encounter a financial planner or advisor trying to sell you a service like that.

If you do have some questions for John or if you’d like to discuss potentially having him take a look at your financial situation too, just like he did with my family, then you can sign up for a free consultation with him by going to buildwealthcanada.ca/john. It’s totally free, and there’s no obligation or anything like that.

Links and Resources Covered

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Questions Asked During the Interview:

You and I went through the entire financial planning process together, with you as our financial planner. After you created the financial plan for us, one of the insights that came out of it, which goes against what we hear in the media a lot is that if you were to retire or semi-retire right now, you don’t necessarily always need a 1 million dollar or more investment portfolio to pull it off.For example, our portfolio wasn’t at $1 million and all the numbers supported that we still have enough for a full retirement right now. Why do you think we often hear in the media how you need that $1 million dollar portfolio, and why is this not necessarily always the case?

To give everyone listening some actionable things that they can do when searching for a financial planner that’s right for them, what are the red flags to look out for when meeting with a financial planner/advisor?

I really like the process that you and I went through when you did our financial plan, and I think it’s a really good example of what the process should be like. So now that we’ve talked about the negative things to look out for and what we don’t want, can you give us a brief overview of your process?. I know this is something you’ve been optimizing for 20+ years so can you also highlight the critical pieces in the process that everyone should have when working with a financial planner?

When you did my plan there were several critical components that you made sure you factored in that could really make a huge impact on whether someone can retire early or not. For anybody looking to do an early retirement, what were these key components that can really shorten the number of years that you need to work?Also, let’s break this question down into 2 parts. First, let’s talk about the controllable factors (ex. Spending, part time work, etc.) which we can all focus on that have the biggest impact on how early we can retire.And then after that, let’s talk about the factors that we can’t directly control, but that absolutely need to be factored into the financial plan, no matter who your financial planner or advisor is, because they have such an enormous impact on our ability to retire early (ex. Inflation, CPP and OAS).

What I really liked in particular was the summary page that you produced where it talked about things like what’s the most we can spend annually and still have enough to stay retired? And how much we actually need to retire? Using our actual numbers and financial plan as a real life example, can you speak to what the results for us were in the context of, what are the answers that we should have from our financial planner when getting a financial plan like this done>

Early retirement execution questions:

Now that we have all the numbers we need from doing a financial plan, let’s switch gears and talk about how to actually execute an early retirement or semi-retirement once you know you have enough in your investments.To start, how should our portfolio change when we move from an accumulation phase (where we’re working full-time, saving and investing), to the decumulation phase where we’re not working at all or only working part-time.

When in retirement, should Canadians tweak their portfolio to generate more yield and try to live off that? or do you suggest just selling-off a percentage of the portfolio every year during good years and keeping a cash cushion during that bad years so that we’re not selling our investments when the markets are down?

For the fixed income portion of our portfolio how do you decide between using bonds vs doing a GIC ladder?

What size of a cash cushion do you suggest for people in retirement or semi-retirement?

How should early retirees deal with moving money out of the RRSP early?
(Explain what the basic personal amount is here too please)

What type of investments should you keep in each of your accounts to help minimize your taxes?

7 Comments

Why use a 2.5% Inflation projection when FPSC(IPQF) suggest using 2%? The reasoning behind 2% seems very sound. They seems to use the average of Inflation of CPP/QPP/Willis Tower Watson investment perspective and Band of Canada(BoC) Inflation to get an average of 2.03% (the only inflation different than 2% were those of QPP). If the best minds thinks 2% is fine, 2% should be fine. Since BoC have announce their desire to fix the inflation to 2% in 1991, it’s been 1.8% on average. Compared to 5.8% for the 30 years prior 1992.

There’s definitely nothing wrong with using 2% in my opinion. There are arguments on both sides. I personally have 2% as the default, but then I also stress-test any financial projections that I do to see what would happen at a rate of 2.5% and even 3%.

Nobody knows what inflation will be with 100% certainty, and the argument is that while 2% is what the Bank of Canada has declared as their goal, historically over a long period of time inflation has been higher than that. Ultimately you have to decide whether you believe they can keep it at 2% indefinitely.

Inflation is a big unknown assumption so I definitely don’t think there’s anything wrong with using 2% when you’re doing your math, but definitely do a stress-test at higher rates to make sure your entire retirement plan isn’t dependent on inflation staying at 2%.

I agree with you that 2.5% may be a good stress test… However, if you adjust inflation rate, than you should also adjust up the other variable. Often like those of FPSC(IPQF) projection estimate, the equity and bonds projection are based off using the projected inflation rate. Therefore, you should adjust the system rather than only 1 variable.

I disagree that historically over a long period of time inflation have been higher than that. True, before the BoC have stated their intend of having 2% inflation it’s true. Since the past 25 years+, inflation have been around 2% in Canada. 25 years is a long historical time.

In any event, I believe that you should stress test the whole system, but be consistent not only in silo but as a whole. Going about and simply do a stress test using lower equity or equity & bond returns seems like a better test. Going with +.5 inflation projection should result in about +.5 equity & bond returns.

That’s a good point. Thanks for your contribution Patrice. I totally agree about stress testing more than 1 variable, and yes, doing a stress test using lower projected returns is definitely a must. For anybody interested, here’s a past episode with projected returns based on several good sources: http://www.buildwealthcanada.ca/investing-returns-what-can-you-expect/
If you have any other good sources Patrice, feel free to share. Thanks again for your insights.

Thanks Michael.
The software that I use is called Snap Projections. Their site is: snapprojectionsapp.com
It’s a fantastic piece of software that many financial planners across Canada use. I’m a huge fan of it and use it for my own financial projections all the time.